Massachusetts misses chance to house booming yogurt maker

Massachusetts passed up a chance to be the home of a booming yogurt startup that was founded by two state residents.

Instead, it's Vermont's Commonwealth Dairy that's doubling. And were it not for the preference of its owner, a German food company, it looks to me like it would be a strong candidate for an IPO.

Commonwealth Dairy — with operations near Brattleboro, Vt, and in Arizona — makes Greek yogurt that accounts for 70 percent of its $70 million in estimated 2013 revenues.

Commonwealth makes yogurt for retailers — such as Wegmans, Costco and others — that private label it and under its own brand, Green Mountain Creamery. And with help from a recently introduced kids yogurt in a pouch, YoYummy, Commonwealth is on track to hit $140 million in revenues by the end of 2014.

Massachusetts entrepreneurs Thomas Moffit, president and chief executive officer, and Benjamin Johnson, vice president and chief financial officer, co-founded Commonwealth in 2011. As I learned in a December 9 interview, they both bolted from their big company employer in 2008 — picking a terrible financing environment in which to raise capital for their yogurt-making venture.

Mr. Moffit's father was an entrepreneur and helped inspire him. As he said, "I majored in Biology and Creative Writing at Colby College and entered the Biology PhD program at the University of Wisconsin, Madison. After two weeks, I realized that I did not want to spend my life in the lab, so I got a Master's in Microbiology. While there, I worked for a distributor of milk, juice, and soda in Madison and after graduation, I headed back East."

He got a job at Daymon Worldwide, a Stamford, Conn.-based food broker. This gave Mr. Moffit exposure to the private label industry — who was buying what and which categories were growing. From there, he took a job at Ahold — helping it so manage the risk in the hundreds of millions of dollars' worth of dairy it bought every year.

As Mr. Moffit explained, "Ahold is where I met Ben. It had six retail banners and a food service business. Ahold had been an aggregator and found that the strategy was not working so it began to sell off stuff and was downsizing. Ben and I were sourcing dairy products and saw opportunity. Ahold was buying 30 million pounds of yogurt a year, demand was growing at 10 percent, and the product options were poor."

This was in 2008 — a time of duress in the global financial markets — but this did not deter Mr. Moffit and Mr.Johnson. According to Mr. Moffit, "A light bulb went off in our head. We saw that Ahold was doing more downsizing and that there was an opportunity in yogurt. We started talk to people — including attorneys in Boston who introduced us to entrepreneurs — including one of the founders of Staples who helped us identify missing links in our plan — for example, we did not know how to make yogurt."

They were able to remedy that flaw. Said Mr. Moffit, "We recruited a yogurt maker — an Austrian guy who was senior vice president of Kozy Shack, a pudding maker. He had the idea of putting yogurt in pouches and told us, 'I was in conversations four or five years ago about this with a German firm. I will give them a call.'"

They pitched their idea in New York to Ehrmann AG — a $1 billion family-run international yogurt company based in Germany.

"In September 2008 — the worst part of the financial crisis — we made our pitch. For three months, we heard nothing. So we kept trying to find other partners, but Ehrmann had the capital and knowhow. In September 2009, we signed the papers with Ehrmann and started constructing our dairy in Vermont," explained Mr. Moffit.

But building a dairy requires more capital than they had — between $25 million and $30 million. According to Mr. Johnson, "We had to finance creatively — seeking state, local, and federal grants — because the private financial markets were closed. But the government was making money available to jump start the economy."

They initially tried Massachusetts — wanting to locate in the Western part of the state — but ended up in Vermont. As Mr. Johnson explained, "We were hoping we could buy mothballed assets near Springfield. But Massachusetts governor, Deval Patrick, was focused on bringing biomedical companies to the state."

Vermont was more interested.

"In trying to pitch Mass., we met the former agricultural commissioner from Vermont and when we pitched there, we found that there was an opportunity to build in Brattleboro — they would grant us new market tax credits and we committed to creating 50 jobs and buying 32 million pounds of milk. We ended up exceeding that — with over 100 employees and 100 million pounds of milk," said Mr. Johnson.

Commonwealth got started in 2010 and got in early on some big trends thanks to their deep knowledge of the industry — particularly Europe, where yogurt consumption is much higher than in the US.

According to Mr. Moffit, "The U.S. market for yogurt is $7 billion — it was only $5 billion in 2010. But Greek yogurt is now $2 billion of that and is growing at thousands of percent a year. The U.S. consumes one-seventh the amount of yogurt that Europe does — but that is growing to one-fifth. We will do $70 million in revenue this year and employ 150 people — and we think we will hit $140 million in revenue next year with help from YoYummy — tapping into the $1 billion kids yogurt market."

The economics of yogurt suggest that Commonwealth may be better off moving more of its production to Arizona. As Mr. Moffit explained, "Milk accounts for most of our cost — it represents 15 percent to 17 percent of the price consumers pay for yogurt — fruit represents another 10 percent. In Vermont, we pay that milk price — 80 percent of which is set at the federal level — to a co-op that represents about 1,000 farms each of which have 50 cows. Retailers get high margins on our product — they can mark it up 40 percent."

Thanks to rapid demand growth, Commonwealth needed more milk — Greek yogurt requires five times more milk than traditional yogurt — and it found to its surprise that Arizona was the place to be. According to Mr. Moffit, "In Arizona, we work with two farms, each of which have 5,000 to 6,000 cows. There you can buy 27 acres of flat buildable land. We will be able to expand milk production efficiently in Arizona."

Commonwealth plans to keep growing and the third generation Ehrmann family owners are not likely to want to take the company public. But all the growth that Commonwealth is enjoying is luring in competition.

Mr. Moffit noted, "Everyone is getting into Greek yogurt now. For example, PepsiCo partnered with a German yogurt maker. And we are moving onto the next big thing — kids yogurt. We love the pouches because they are easier for the kids and less messy for the parents."

It's too bad for Mr. Moffit and Mr. Johnson that they do not own more of the equity in Commonwealth — but they would not have been able to enjoy such rapid success without the help from Ehrmann.

Nevertheless, if they can keep ahead of their competitors with yogurt innovations, Commonwealth is likely to keep growing fast.

Peter Cohan of Marlboro heads a management consulting and venture capital firm, and teaches business strategy and entrepreneurship at Babson College. His email address is peter@petercohan.com.